As consumers, we can all possibly tell stories of how the pandemic has affected our lives — including confidence in the economy, spending habits, and life choices since March. The current news headlines on the second wave of the novel coronavirus outbreak worldwide are likely to affect consumer sentiment and spending this fall and winter. Therefore, let’s look at seven consumer stocks for an impenetrable defense even if moods ebb and flow.
How do consumers feel about the state of the economy and its future? In addition to anecdotal evidence and news headlines, economists conduct regular surveys and construct indices that may help gauge the sentiment. For example, the Organisation for Economic Co-operation and Development (OECD) — which has 37 member countries including the U.S. and other developed economies — publishes a “Consumer confidence index (CCI),” whose long-term average is 100. In May, it fell to a multi-year low of 97.67. And the reading for September stands at 98.51.
Moreover, in the U.S., the University of Michigan’s Consumer Confidence Index and the Conference Board Consumer Confidence Index are measures of public confidence. That said, recent results from both indices also show similar readings. So, although consumers are feeling better compared to earlier in the year, the sentiment is still subdued.
Typically, how the Main Street feels affects what happens on Wall Street. For example, the S&P 500 bottomed out on March 23, having decreased close to 35% from its level on Feb 19. Since then, broader markets and shares of many companies have risen sharply. In fact, a large number of stocks hit new highs by early September. The S&P 500 index also saw an all-time high on Sept. 2. But, the indices have been consolidating since.
Yet, it is hard to know how broader markets mare fare in the coming weeks. However, the stock market offers investors plenty of solid shares that may be appropriate for a range of portfolios. With that information, here are seven consumer stocks that you may consider:
- Apple (NASDAQ:AAPL)
- Boston Beer (NYSE:SAM)
- Global X MSCI China Consumer Disc ETF (NYSEARCA:CHIQ)
- iShares Global Consumer Staples ETF (NYSEARCA:KXI)
- Kroger (NYSE:KR)
- Ollie’s Bargain Outlet Holdings Inc (NASDAQ:OLLI)
- SPDR S&P Dividend ETF (NYSEARCA:SDY)
Now, let’s dive in and take a closer look at each.
Hot Consumer Stocks: Apple (AAPL)
Legendary investor Warren Buffett, who heads Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), calls Apple a consumer company. He loves AAPL stock so much that it constitutes more than 40% of his portfolio.
Last week saw the release of a “Brand Intimacy Covid Study,” where Apple ranked as the most intimate brand in the days of the pandemic. Competitors Amazon (NASDAQ:AMZN), Alphabet’s Google (NASDAQ:GOOG, NASDAQ:GOOGL) and Walmart (NYSE:WMT) follow Apple in the rankings.
Also, recent research led by Wayne Read of Melbourne, Australia highlights, “Brand intimacy refers to how well consumers understand a brand.. Intimacy is important to relationship development between people in general, as well as for consumer and brand relationships.”
Moreover, Apple is holding its digital-only event, called “Hi, Speed” on Tuesday. Here, management is expected to introduce the new iPhone 12 lineup because Apple generally launches iPhones at its September events. Then, Cupertino, California-based tech giant is expected to release its next quarterly metrics later this month.
So far in the year, AAPL stock is up about 67% and hit an all-time, intraday high of $137.98 on Sept. 2. Since then, like many other tech stocks, shares have come under pressure and currently hover at $122. Between now and early November, there is likely to be further volatility in the markets. That said, this may possibly put a short-term cap on Apple stock.
However, InvestorPlace’s Louis Navellier recently said when Apple declines, “…the dip seldom lasts long before it returns to growth.” I agree with him, and thus suggest potential investors consider buying the dips in AAPL stock shares.
Boston Beer (SAM)
Recent research has looked at the levels of alcohol consumption among university students during the pandemic. The study led led by William Lechner of Kent State University, Ohio concludes:
“The COVID-19 pandemic has had wide-scale impacts on society in the United States… Participants reported both increased alcohol consumption on drinking occasions, and more drinking occasions overall.”
That said, the increase in the share price of Boston Beer — which is best known for its Samuel Adams beer — may be a testament to the increased use of alcohol in the past few months. Year-to-date, the shares are up more than 150%, and hit an all-time high on Tuesday.
In addition to 60 styles of Samuel Adams, the company holds a number of other brands, including Twisted Tea, Truly Hard Seltzer, Angry Orchard Hard Cider, Dogfish Head Craft Brewery, Wild Leaf Hard Tea and Tura Alcoholic Kombucha — as well as various local craft beer brands.
On July 23, the Boston, Massachusetts-based company released Q2 results. Quarterly revenue was $452.1 million, marking an increase of $133.7 million or 42% year-over-year. Net income came in at $60.1 million, a YoY increase of 116%. Earnings per diluted share were $4.88, a YoY increase of $2.52. With all of that in mind, investors cheered the results.
Chairman Jim Koch had this to say about the results:
“I am tremendously thankful for the efforts of our coworkers in achieving our ninth consecutive quarter of double-digit growth, while maintaining a focus on quality and innovation… We remain positive about the future growth of our brands and are happy that our diversified brand portfolio continues to fuel double-digit growth.”
As a result of the recent run-up in price, SAM stock is richly valued. Forward price-earnings (P/E) and trailing price-sales (P/S) ratios are 60.98 and 7.67, respectively. Thus, I’d consider waiting on the sidelines until the company releases its next quarterly results. A drop toward the $875-level would improve the margin of safety.
Hot Consumer Stocks: Global X MSCI China Consumer Disc ETF (CHIQ)
China is the world’s most populous nation with approximately 1.4 billion residents. It is also the second-largest economy behind the U.S. In fact, according to research by Wei Zheng of Wuhan University, China and Patrick Paul Walsh of University College Dublin, Ireland:
“As the largest developing country, with fast-paced economic growth, China’s development has been characterized by a high degree of energy consumption, high level of heavy industry, international trade and urbanization progress.”
This economic growth means great consumption levels, especially by a rising middle class. The country also has an increasing mobile user penetration, which is likely to act as a catalyst behind greater revenues in Chinese businesses. For example, China’s e-commerce market of $2 trillion tops the world list — well ahead of the U.S.
Investors who would like to capitalize on the unstoppable growth the Chinese consumer may want to invest in exchange-traded funds (ETFs), such as the Global X MSCI China Consumer Disc ETF. The fund, which has 69 holdings, provides exposure to large- and mid-capitalization (cap) Chinese consumer companies.
The top ten firms make up around 55% of CHIQ. Meituan Dianping (OTCMKTS:MPNGF), Alibaba (NYSE:BABA), JD.com (NASDAQ:JD), Nio (NYSE:NIO) and TAL Education Group (NYSE:TAL) head the list of companies.
Year-to-date (YTD), the ETF is up about 58% and hit an all-time high in October. That said, this member of the top consumer stocks should be on your shopping list.
iShares Global Consumer Staples ETF (KXI)
Most long-term portfolios hold a range of consumer staple stocks. After all, we all depend products manufactured or sold by these firms. They include food and drinks, household items as well as personal hygiene products. A large number of consumer staples stocks are also consistent dividend payers. Investing in an ETF that provides exposure to such shares may, therefore, appeal to many investors.
That said, the iShares Global Consumer Staples ETF has 92 total holdings. Around 53% of the businesses are U.S.-based, followed by the U.K., Switzerland, Japan and France. Among the top ten companies are Procter & Gamble (NYSE:PG), Nestle (OTCMKTS:NSRGY), Costco (NASDAQ:COST), Walmart (NYSE:WMT), Pepsi (NASDAQ:PEP), Diageo (NYSE:DEO) and Unilever (NYSE:UL).
It is possible that in the coming weeks, economies around the world may contract. Yet, demand for consumer staples is likely to stay constant. Therefore, owning such consumer stocks or ETFs that hold them may be a solid defensive action.
Since the start of the year, KXI is up about 2.4%. Overall, I’d look to buy the dips in the fund. And although most of the companies are based in developed economies, they all have growing operations in emerging markets, too. As a result, the fund gives exposure to the growth in middle-income classes of emerging regions. 2020 has been an extraordinary year with persistent question marks on the state of economies worldwide. But, eventually, the global growth story is likely to return.
Hot Consumer Stocks: Kroger (KR)
According to recent research led by Jasper Grashuis of University of Missouri:
“Considering the temporary closure of many food-away-from-home establishments, consumer expenditure on groceries during the COVID-19 pandemic has increased. In the United States, where 54% of food is consumed away from home under normal circumstances…, most eating establishments have been mandated by the government to close temporarily. However, even during the pandemic, groceries are still basic human necessities. In fact, consumer expenditure on groceries is on the rise in every type of grocery store.”
As a result, shares of many food manufacturers and supermarkets like Kroger have been increasing. Cincinnati, Ohio-based Kroger manufactures food for sale in its supermarkets. In addition to food production plants, warehouses, supermarkets, and in-store pharmacies, it also owns fine jewelry stores. Its family of companies include Dillons, Fred Meyer, Fry’s, Gerbes, Jay C Food Store and Pay-Less Super Markets, among others.
Moreover, fiscal year 2019 sales of $122.3 billion made the group one of the largest retailers globally. The company whose history goes back to 1883, ranks No. 23 on the Fortune 500 list.
In early September, it released Q2 results. Revenue was $30.5 billion, compared to $28.2 billion a year ago. Excluding fuel, revenue grew 13.9%. Gross margin of 22.8% meant an increase of 5 basis points. Management credited sourcing efficiencies and alternative profit steams.
CFO Gary Millerchip said:
“…There are still many uncertainties and, as a result, we are providing a wider guidance range. For the full year 2020, we expect total identical sales without fuel to exceed 13% and we expect to achieve adjusted EPS growth of approximately 45% to 50%. …these factors also lead us to believe that our 2021 business results will be higher than we would have expected prior to the COVID-19 pandemic.”
YTD, the shares in this consumer stock is up nearly 20%. And although there may be short-term profit-taking, expect KR stock to deliver strong shareholder returns in the coming quarters, too.
Ollie’s Bargain Outlet Holdings (OLLI)
Olivier Coibion of University of Texas at Austin, Yuriy Gorodnichenko University of California at Berkeley, and Michael Weber University of Chicago have recently conducted a customized survey and published a study, titled “The Cost of the COVID-19 Crisis: Lockdowns, Macroeconomic Expectations, and Consumer Spending.”
In this, they highlight the following:
“About 50% of survey participants report income and wealth losses due to the corona virus, with the average losses being $5,293 and $33,482 respectively… Households also spend substantially less on discretionary expenses such as transportation, travel, recreation, entertainment, clothing, and housing-related expenses. Medical expenses, utilities, education-related expenses, and food expenses also decrease but to a lesser extent. We also document large decreases in planned spending on durables during the crisis.”
In such an economic environment, many consumers tend to shop at retail outlets or online where they believe they are getting the most for their money. As a result, shares of such businesses, like Ollie’s Bargain Outlet Holdings, tend to do well.
Overall, the company describes itself as a “highly differentiated and fast-growing, extreme value retailer of brand name merchandise at drastically reduced prices. Known for our assortment of “Good Stuff Cheap,” we offer customers a broad selection of brand name products, including housewares, food, books and stationery, bed and bath, floor coverings, toys and hardware.”
In late August, the group reported robust Q2 results. Revenue of $529.3 million meant a YoY increase of 58.5%. Adjusted net income went up 193.5% YoY to reach to $68.9 million. Diluted earnings per share (EPS) was $1.04. The retailer also opened six stores, and now operates 366 stores in 25 states.
CEO John Swygert cited, “We delivered our best quarter in our 38-year history with record top- and bottom-line results… It’s the effectiveness of our model, our strong financial position and long-term growth opportunities that keep us very excited about our future.”
So far in the year, OLLI stock is up more than 44% and hit an all-time high in August 2020. That said, the company is likely to continue benefiting from the current environment.
Hot Consumer Stocks: SPDR S&P Dividend ETF (SDY)
Our final discussion centers around another exchange-traded fund. The SPDR S&P Dividend ETF provides exposure to companies that have consistently increased their dividend for at least 20 consecutive years. SDY, which has 117 holdings, tracks the S&P High Yield Dividend Aristocrats index.
In terms of sectoral allocation, Industrials lead the way with 18.8%, followed by Financial (18.3%), Consumer Staples (13.6%) and Utilities (12.6%). Therefore, it gives access to a wide range of industries.
Collectively, no single share has a weighting of more than 2.1%. Thus, SDY price does not fluctuate heavily due to changes in a company’s stock. Among the top ten holdings are AT&T (NYSE:T), Eaton Vance (NYSE:EV), Exxon Mobil (NYSE:XOM) and National Retail Properties (NYSE:NNN).
YTD, the fund is down close to 10%. As a result of the declines, its trailing P/E and price-book (P/B) ratios stand at 18.07 and 2.11. I’d look to buy SDY, especially if there is a decline toward the $90-level.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.